Evaluation of Competitive Tenders in China: Theory and Practice

The problem of ensuring competitiveness and transparency in public procurement has been a preoccupation of many developing countries, and a special concern of multilateral agencies financing infrastructure projects. The opportunities for commercial parties to influence government officials responsible for project procurement are many, and the result can be disastrous for public finances and even for public safety. China's willingness to now legislate in this area is presumably driven as much by the economic needs of competition and transparency and the political imperative to reduce the reality and appearance of corruption as by the pressures of multilateral agencies and impending membership in the WTO.

Quite apart from public policy concerns, participants in the tender process for major projects have a keen interest in understanding what types of behaviour could jeopardize their bid, or from another point of view, what types of behaviour by competitors could give them a procedural right to challenge an unfavourable outcome. Participants in competitive tenders are usually quite anxious to know as much as possible about the composition of the tender committee and the evaluation rules, to influence the tender committee to prefer one form of technology or design over another, and (if possible) to learn the contents of competitors' bids, either before bid submission or during negotiation. Consultants are often retained specifically to assist in gathering such information. In addition, bidders frequently choose to be less than explicit about certain elements of their bid, or suggest alternate approaches or exceptions to the requirements of the tendering committee in the hope of preserving flexibility for later negotiations. The Tentative Provisions cast an interesting light on all these practices and tactical choices.

RELEVANCE FOR FOREIGN COMPANIES AND Foreign Investment ENTERPRISES

The Tentative Provisions are formulated in accordance with the Bid Law, which applies to all engineering and construction projects (including survey, design, construction, supervision and procurement or important equipment and materials) within the borders of China to the extent that:

• the project will benefit public interest or safety, such as large scale infrastructure projects and public utilities;
• the project receives entire or partial funding from State funds or is otherwise financed by the State (emphasis added);
• the project uses loans from international organizations, foreign governments or aid funds.

There would appear to be few large projects that would not fall within the first category. The second and third categories relate not to the scale or purpose of the project but the nature of its financing. Here it is important to note that the phrase "international organizations" would not include foreign commercial banks, but might be interpreted to include such multilateral organisations as the Asian Development Bank or International Finance Corporation.

While a project (not otherwise falling within the first category) financed solely from internal funds by a wholly foreign-owned enterprise (WFOE) would appear to be outside this body of regulation (thus permitting such WFOE to tender or negotiate construction contracts as it saw fit), any foreign investment enterprise (FIE) involving State-owned Chinese partners would need to consider whether the notion of "partial funding from State funds" would mean that the Bid Law and related regulations applied to construction and procurement by such entity.

Thus a foreign or FIE bidder should consider how it wishes to take advantage of its procedural rights in seeking business in the infrastructure area, and a FIE (except in some cases a WFOE) will need to ensure that it complies with such procedures in bidding out work.

PRACTICE AND THEORY

Before taking an overview of the Tentative Provisions, it might be useful to consider points that an experienced, even cynical, participant in competitive tenders might note on first encounter with the new Bid Law regime:

• The Bid Law's prohibition on territorial restrictions on bidders is clearly designed to avoid provincial protectionism. It also prohibits requiring or specifying a particular producer or supplier, or other particulars that favour or preclude potential bidders. However, practitioners will note that technical or financial requirements for a project can at times have the practical effect of disadvantaging certain bidders, and may therefore be challenged on that basis.
• The Bid Law also prohibits disclosing to a third party the names or number of potential bidders. Practitioners who have seen such lists routinely published in trade journals, or huddled with consultants for scraps of rumour as to the leanings of the tender committee, could be excused if they considering the application of these blanket prohibitions as likely to be somewhat more nuanced in practice.
• The Bid Law's prohibition on collusion between bidders is to be expected and is of course appropriate. However, one perhaps surprising way in which this can arise occurred in a recent major tender when several bidders used the same financial and legal advisor. The Chinese authorities in that case required all bidders to represent in writing that adequate Chinese walls were in place. Another area of potentially surprising application of this principle is situations in which the Chinese officials are encouraging potential bidders to form consortia. Obviously the information shared to form a consortia could be seen as a form of collusion if the participants end up going it alone.
• In most respects the focus of the regulations is domestic Chinese entities, although by its terms the Bid Law applies to FIEs as well. An example of the tensions between the typical requirements of domestic projects and international ones is the requirement in the Bid Law that contracts be signed within 30 days of bid award. In recent large infrastructure projects involving foreign financing, contracts are not formally signed for many months after bid award until just before financial close. Instead they are "initialled" to indicate no binding contract has yet been entered into.
• Perhaps the most powerful weapon that the new regulations provide to bidders is a cause of action in the event that a competitive bid is not run fairly. If the bid invitation agency violates confidentiality, or there is collusion among bidders or other irregularities, the Bid Law states "the acceptance of the winning bidder's bid shall be void". Obviously a company expecting a long career in China would need to think long and hard before publicly invoking such provisions; but the threat of doing so may be enough in some situations to "focus the mind" of officials who otherwise would be tempted to allow extraneous factors too great a weight in the process.
• Finally, for bidders who for reasons of internal risk analysis wish to limit their liability for breach of bid conditions to the amount of the bid bond or performance bond, there is an important consideration. The Bid Law states "if the winning bidder fails to perform the contract concluded with the bid-inviting party, the performance bond shall not be refunded. If the losses caused to the bid inviting party exceed the amount of the performance bond, the winning bidder shall also compensate for the excess". Counsel should be consulted as to ways to counteract this provision through other written undertakings.

The Tentative Provisions

China has experienced in recent years a rapid growth in the infrastructure construction market. However, legislative developments have lagged behind and the government has encountered serious problems in this area in implementing the spirit of the Bid Law. As some officials have admitted, some bid inviting parties have not disclosed the standards and methods of bid evaluation in their bid invitation documents, or have modified the standards and methods in an arbitrary manner, resulting in unfair competition among bidders and the appearance of corruption. Some bid inviting parties have established unreasonable and prejudicial standards and methods to exclude certain potential bidders, while others have not had an independent evaluation committee with necessary expertise, and tried to directly influence and interfere with the evaluation results.

Meanwhile abuse on the bidder side has not been absent. Some bidders have submitted their bids in other parties' names, colluded with other bidders, or used bribes or other fraudulent means to win the bid. Some administrative officials involved in bid evaluation have also tried to influence the evaluation results, and other departments functioning as supervisors have tried to set up unreasonable approval and examination procedures to hinder the normal process of bid evaluation. The new Tentative Provisions directly address these problems.

BID EVALUATION COMMITTEE AND EXPERTS

In the Tentative Provisions, as compared with the Bid Law itself, the bid inviting party is given more autonomy to establish an evaluation committee responsible for bid evaluation. No other work units or individuals shall unlawfully interfere with the process and result of the bid evaluation. Article 7 provides that the evaluation committee shall recommend to the bid inviting party candidates for the winning bidder or directly determine the winning bidder upon authorization by the bid inviting party.

According to Article 20, if the evaluation committee discovers that a bidder submits its bid in the name of another party, colludes in the bid submission, seeks to win the bid by offering bribes or uses other fraudulent means, the evaluation committee has the authority to invalidate such bid.

It should be noted that the evaluation committee is still not entirely independent from the bid inviting party. Article 9 provides that the members of the evaluation committee shall be composed of the representatives of the bid inviting party or of its authorized agency. Further, Article 8 requires that the list of members of the evaluation committee shall be, in general, determined prior to the opening of bids and the list shall be kept confidential until the winning bidder is determined.

The evaluation committee shall also be composed of experts in relevant fields such as technology and economics. The number of experts shall be no less than two-thirds of the total number of members. The Tentative Provisions also provide the method of selection of the experts: random selection or direct selection. For ordinary projects, experts may be selected randomly by the government or be selected from a pool of experts. For projects involving complicated technology and high expertise, experts may be determined by the bid inviting party directly if the experts determined by random selection are not qualified. Such stipulation infers a close connection between the bid inviting party and the evaluation committee that is worth close scrutiny.

To avoid the conflict of interests, Article 12 provides certain categories of persons who cannot be a member of the evaluation committee, i.e., a close family member of a bidder or of a principal person in charge for a bidder, a staff member of an administration or supervision department in charge of the project, or any person having an economic relationship with a bidder that may have impact on the impartial evaluation of bids. The provisions do not deal with the common situation in practice of officials who have been hosted on significant foreign inspection trips by bidders.

The Tentative Provisions state that members of the evaluation committee shall not have any private contact with any bidder or person having a material interest in the evaluation result, and shall not accept any property or benefit from a bidder, an intermediary or other interested person. Evaluation committee members and the working personnel participating in the bid evaluation shall not disclose to others any details of the bid evaluation.

BID EVALUATION PROCESS AND METHODS

The Tentative Provisions provide for a two-step evaluation process: the preliminary evaluation and the detailed evaluation. However, it should be noted that the Tentative Provisions also fail to provide satisfactory answers to certain common questions that occur during bid invitation and submission, especially when considering the rights and interests of bidders.

Preliminary Evaluation

Article 16 of the Tentative Provisions provides that if the bid inviting party has set a reserve price, the confidentiality of the reserve price must be maintained, and the bid evaluation process must make reference to the reserve price. The Tentative Provisions also require that the evaluation standard and the methods should be "reasonable" and should not have any preference for or preclusion of certain potential bidders, or interfere with or restrict the competition between bidders. Only evaluation standards and methods specified in the bid invitation document should be used; other standards and methods should not be the basis for the bid evaluation.

An unsuccessful bidder suspicious of a low bid from a competitor should be aware of Article 21, which states that if the evaluation committee discovers that a bid price submitted by a bidder is significantly lower than other bid prices or significantly lower than the reserve price, the evaluation committee may consider that the bid price so submitted is lower than cost. In such situation the evaluation committee must require the bidder to provide a written explanation with relevant supporting documents. If such bidder is unable to do so, the evaluation committee must determine that such bidder is tendering with a price lower than its cost and its submission will be deemed to be void. Although this stipulation is aimed at reducing unfair competition among bidders, any debate concerning the real cost for a large complex infrastructure project is bound to be complex and in any event it will be hard to convince most governments to throw out the low bid.

According to Article 23, the bid evaluation committee can invalidate a bid if it does not respond to all substantive requirements and conditions specified in the bid invitation document. Deviations are divided into major and minor deviations. This is an important distinction for bid tactical planning: if a major area of deviation is made it could cost the bidder its bid.

Major deviations include:

a) Failure to provide a bid guarantee or the guarantee provided being defective;

b) No signature of an authorized representative of a bidder and no official seal of a bidder in its bid document;

c) Completion date of the project exceeding the date specified in the bid invitation document;

d) Obvious non-compliance with the requirements of technical specifications and standards;

e) Product packaging formula and inspection standards and methods, etc. not complying with the requirements specified in the bid invitation document;

f) Certain conditions attached in the bid document being not acceptable to the bid inviting party; and

g) Non-compliance with other substantial requirements specified in the bid invitation document.

If any of above major deviations occurs, the bid will be considered as not responding to the substantive requirements of the bid invitation document and will be void.

Minor deviations are defined as the situation where a bid responds to the substantive requirements of the bid invitation document but there exist certain omissions, or the technical information and data provided are incomplete, and the corrections of such omissions or incompleteness will not cause any unfair result to other bidders. Article 26 specifically provides that minor deviations will not affect the validity of a bid.

The evaluation committee may require a bidder having minor deviations to make corrections in writing before the close of the bid evaluation process. If the bidder refuses to do so, such minor deviations may, in the process of the detailed evaluation, be quantified in a manner unfavourable to such bidder, provided that the standards of such quantification shall be specified in the bid invitation document.

Detailed Evaluation

Bids qualified after the preliminary evaluation will go through the second step: the detailed evaluation. This part of the process will compare the technical presentation and the commercial presentation contained in bid documents. Article 29 of the Tentative Provisions provides two specific methods: the lowest bid price evaluation method and the comprehensive evaluation method.

The lowest bid price evaluation method generally applies to projects with technology and performance criteria of a general nature or to such projects that the bid inviting party does not have a specific requirement for the technology and performance. When using the lowest bid price evaluation method, a bidder who meets the substantive requirements of the bid invitation document and submits the bid at the lowest price shall be recommended as the winning bidder. When using the lowest bid price evaluation method, Article 32 requires that the evaluation committee shall make necessary adjustments to the bid price and commercial part of a bid, and such adjustment method shall be specified in the bid invitation document. It does not require the evaluation committee to make adjustment to the technical part of the bid.

The comprehensive evaluation method applies to projects that are not suitable for adopting the lowest bid price evaluation method. Article 35 provides that when using the comprehensive evaluation method, a bidder who meets, to the greatest possible extent, all of the overall evaluation standards specified in the bid invitation document shall be recommended as the candidate for the winning bidder. It allows the evaluation committee to set up rather flexible methods to assess whether a bid meets, to the greatest possible extent, all of the overall evaluation standards. It also requires the bid invitation document specify certain factors to be quantified and their weights to be assigned. After the quantification of the technical part and the commercial part of each bid, the evaluation committee shall calculate the overall evaluation price for each bid.

Article 38 further provides that if bidders are permitted to submit alternative bids, the evaluation committee may evaluate the alternative bid submitted by the winning bidder only and no consideration shall be given to the alternative bids submitted by other bidders who do not satisfy the conditions of the winning bidder. This is a provision that should be clarified with the specific tendering committee before important tactical assumptions are made about the utility of an alternative bid.

DETERMINATION OF WINNING BIDDER

After completing the bid evaluation, the evaluation committee shall submit a written evaluation report to the bid inviting party and the evaluation report shall be signed by all of the members of the evaluation committee. Article 43 provides that any member who has objection to the conclusion of the bid evaluation may express his different opinions and reasons. If the member refuses to sign the evaluation report and does not express his reasons, he will be deemed to agree with the conclusion of the bid evaluation.

After the winning bidder is determined, the bid inviting party shall issue a notice with legally binding effects to all interested parties. The bid inviting party shall enter into a contract with the winning bidder within 30 working days after the issuance of the notice. The contract concluded between the bid inviting party and the winning bidder shall correspond to the bid invitation document and the bid document submitted by the winning bidder, and the parties shall not subsequently conclude other agreements that may contravene the substantive terms of the contract. As noted above, in foreign financed infrastructure tenders, particularly in the case of recent BOT projects, such time frame has not been adhered to.